The two-month extension of the employee 2-percent cut in the employee Social Security tax rate is now law. (H.R. 3765). In spite of the last-minute massaging to keep payroll systems from failing, it’s still a dog’s breakfast.
The plan extends the 2011′s reduced employee FICA and self-employment tax rates through February. Because payroll systems aren’t programmed to include two different FICA bases in a single year, employee wages in excess of the FICA maximum for two months ($18,350) will be subject to an additional 2% income tax.
This still leaves us problems with managing a 2-month employment tax cut. For instance, payroll processing systems aren’t set up to break out wages for a two-month period for W-2 reporting, as will be required under this new law. It will require some fast programming, a lot of manual work at payroll processors, or, most likely, an extension of the break through 2012.
The politicians who stampeded themselves into this silly legislation can be expected to repeat the stampede in two months to avoid this tax hike. The best we can hope is that they will enact it for the remainder of the year all at once. As with most “temporary” provisions, the politicians have no intention letting it expire. They only make the provisions “temporary” in service of a lie — of a fictional undercounting of the true revenue loss.
Meanwhile, the bill increases the built-in underfunding of Social Security and the uncertainty of public policy — arguably bigger obstacles to the economy than any “stimulus” that will be achieved. And it’s not like the track record of stimulus proponents generates a lot of confidence.


Chart courtesy The Heritage Foundation.
Links:
IRS explanation of new law
TaxProf coverage